Home Money & You Embrace good debt and avoid bad debt

Embrace good debt and avoid bad debt

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Reasons why you should …

In this article, we will explore what is good debt and what is bad debt.

Debt is borrowed money. It is an essential tool in today’s world. Countries need it to manage the economy. People need it to meet their needs and wants.

But did you know that not all debts are the same? Debt can be your friend if used wisely, or your enemy if used inappropriately.

 

Some luxury cars can be exceptions if they are used for income-generating purposes, e.g. wedding hire and event planning projects.

Good debts

Good debts are debts that can bring you good returns and help increase your wealth. In general, if you use debt to buy something that can produce returns and help pay off the debt, then it is a good debt. It is like the concept of using money to make more money. Let’s look at a few examples:

white concrete building near swimming pool
Good debt is an investment that will grow in value or generate long-term income
  • Business equipment/tools
    • If debt is used to buy business equipment/tools, it is a good debt because the purchase can help you generate income for your business. When you have more income for your business, you can pay off the debt.
  • Investments
    • If the debt is used to buy investments, it is a good debt because investments can provide income and capital returns to grow your wealth. When your wealth grows, you can pay off the debt.
  • Education
    • If debt is used to pay for education, it is also a good debt because education can help you grow. The more knowledge you have, the more earning potential you have. When you earn more, you can pay off the debt.

A debt may also be seen as good if it can help you reduce your expenses. For example, loans for investment and business purposes are generally tax deductible.

It’s ok to have nice stuff.. Just don’t let your stuff have you…

Bad Debts

Bad debts are debts that cannot offer you any returns and can potentially drain your wealth. Let’s look at a few common examples:

  • Cars and motor vehicles
    • If debt is used to buy a car, it is generally a bad debt because cars depreciate in value over a short time, and you end up paying more than the car’s value. This also applies to other motor vehicles, such as bikes, and other items that depreciate in value.
    • There may be an exception if the car or motor vehicle is able to produce an income or return that is greater than the debt.
  • Credit cards and personal loans
    • Credit cards and personal loans are usually used to pay for personal needs and wants. Even if they are used for a personal need (e.g. emergency expense), they are still considered to be bad debts because they often come with very high interest costs.
    • It is extremely difficult to find a wise purchase that can produce returns greater than the costs of such debts.
  • Other luxury/lavish items

If the debt is used to buy branded bags, accessories, clothing, toys, or other luxury or lavish items that you want to have but do not need, then the debt is clearly a bad one.

Conclusion

Most luxurious items depreciate in value over time. When you decide to buy these, you are satisfying your temporary desire at the expense of your wealth. By the time you realize that your wealth is more important, you will most likely regret the purchase.

luxury handbag Louis-Vuitton
Handbags speak louder than words: ‘Gigi, New York.

In addition, bad debts are generally not tax deductible.

Next time you get into debt, make sure you use it wisely. Make it a good debt!


 

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Washington Mazambani
As a seasoned wealth mentor and advocate of financial freedom, I bring a wealth of expertise and passion to my clients' journeys. With a background deeply rooted in the financial industry, I have transitioned into a trusted mentor and coach, driven by my sincere desire to help individuals achieve lasting wealth through property investment. I invite you to join me on this transformative journey, where passion meets expertise, and dreams become reality. Together, let's unlock your full wealth potential and embark on a path toward financial independence.

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